There has been no official confirmation on the resumption of talks with the Palestinians but Israeli military radio reported informal sessions will take place on Wednesday with formal discussions reopening Thursday.

Barak recalled his delegation to Jerusalem for consultations Tuesday in response to the killings of two Israeli restaurateurs.

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CNN's Jerrold Kessel reports on the departure of Israeli negotiators after the killing of 2 Israeli civilians

The Israeli government said it would "lay its hands on the lowly murderers and will punish them with all severity of the law."

Ahmed Qorei, head of the Palestinian negotiators, said his team was remaining in Taba, but would also be weighing whether to return to the negotiating table.

The Palestinian Authority issued a statement denouncing the killings, with Qorei adding: "We condemn the killing of all civilians."

Israeli Foreign Minister Shlomo Ben-Ami and Cabinet Secretary
Gilead Sher returned to Jerusalem, the Israelis said, while lower-level members of the Israeli negotiating team remained in Eilat, on the Israeli side of the border.

An Israeli official said the two victims were restaurant owners from Tel Aviv who, accompanied by an Israeli Arab business associate, were eating lunch in the town of Tulkarm when they were seized and shot dead.

Their bodies were dumped by the side of the road and the Israeli Arab was freed, Deputy Defense Minister Ephraim Sneh said.

The deaths brought the toll to at least 310 Palestinians, 47 Israelis and 13 Israeli Arabs killed in almost four months of violence.

A senior Israeli military official told CNN that the Israel Defense Forces view the killings as further evidence that the Palestinian Authority was doing little to prevent the killing of Israeli civilians.

The killings came after reports of "significant progress" on territorial issues in talks with the Palestinians.

The turnaround in the progress of negotiations was swift. As the third day of talks began on Tuesday, sources on both sides told CNN there had been "positive developments" on the issue of how much West Bank land Israel would retain in a peace agreement.

By the end of the day the talks had been called off.

No movement was reported on two other key issues: Jerusalem -- including who will have control of the holy sites -- and the right of Palestinian refugees and their descendants to return to lands left in 1948.

In Jerusalem, Barak told Israeli high school students he felt there needed to be joint administration of the holy sites in the Old City to provide access to all religious groups.

He said such a joint administration would not affect Israel's sovereignty over the Western Wall, the Mount of Olives and the City of David.

"In order not to have a split and divided city, and in order to have free access to everyone to the sacred places, we need to respect the right of the believers, and we have to find a way that the practical day-to-day administration of the Old City will be shared administratively," Barak said.

"And all that has no connection with our sovereignty. No one will touch and take away our sovereignty over the Western Wall or the Jewish Quarter or on the Mount of Olives."

On the West Bank land issue, former U.S. President Bill Clinton had proposed that Israel keep between 4 percent and 6 percent of the West Bank. The Israelis had said they wanted 11 percent.

However, CNN was told Israeli maps presented at the talks had scaled down the 11 percent to 7 percent of the West Bank in the context of a peace deal.

Barak is trying to strike a deal that could reverse his fortunes in the polls as he heads into the February 6 election.

Polls published in Israel on Tuesday showed that hawkish Israeli Likud leader Ariel Sharon holds a commanding lead of 16 percent to 20 percent over Barak.

Sharon has said if he wins he will not honor any deal negotiated by Barak. However, the Palestinians are said to believe that if a deal is struck, Sharon will have difficulties ignoring it.

CNN correspondent Jerrold Kessel and Reuters contributed to this report.